Report Says Regulations Must Encourage SWFs to Invest in US Infrastructure

(March 13, 2011) — A new report by the Brookings Institution has asserted that the US should offer a greater number of incentives for sovereign wealth funds to invest in American infrastructure.

The report stresses that US policymakers should become more accepting of foreign investments and should offer tax breaks and loan guarantees. The incentives, the Brookings Institution says, would encourage the world’s sovereign wealth funds, whose assets have swelled 11% in the past 12 months to about $4 trillion, to invest in the US.

“With America’s 2009-10 federal budget deficit projected to total $1.5 trillion and its public debt expected to rise to about $13.5 trillion this year, the need for foreign investment－properly focused and thoughtfully structured－is high,” the report states, identifying potential approaches to address long-term financial needs in partnership with foreign capital. Some of the report’s central conclusions are the following:

1) Acknowledging the Value of Foreign Capital to the United States: Xenophobic or paranoid reactions to foreign capital are not warranted, according to the report, given the generally conservative investment and management practices of the world’s sovereign wealth funds.

2) Driving Policies and Programs that Facilitate Capital Deployment: The US requires enhanced policies and innovative new programs that encourage capital deployment by global public investors, such as sovereign wealth funds and pensions, to meet both public and private sector needs.

3) Promoting Investment in US Infrastructure: While it is acknowledged that the US is struggling to figure out how to improve its national infrastructure, foreign capital can aid infrastructure development through direct investment and public-private partnerships.

The study also notes that sovereign wealth funds are cautious about the US regulatory environment. “Based on the multitude of data-points we examined, this analysis concludes that the preponderance of sovereign wealth funds and other global public investors are inherently cautious, focused on capital preservation, asset diversification, predictable returns, and the mitigation of political risk,” according to the report. “As noted, most limit their equity ownership stake in public companies, financial institutions and private businesses to minority status and eschew direct management responsibility.”

Meanwhile, a recent report by Preqin has shown that the proportion of SWFs investing in infrastructure has increased from 47% in 2010 to 61% at the beginning of this year. Infrastructure has been an increasingly popular investment for institutional investors in 2011, exemplified by the Caisse de Depot et Placement du Quebec, which has almost rebounded from a disastrous 2008 performance, with infrastructure and private equity holdings helping the investment giant to outperform its benchmark index. After suffering a $40 billion loss in 2008, the Caisse de Depot et Placement du Quebec reported that it posted a 13.6% return in 2010 investment, with net assets up $20.1 billion to $155 billion (C$151.7 billion). The gains, the fund said, were driven by private equity, infrastructure, stocks and fixed income.